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Three Tips to Enhance Forward Pricing Budgets

By Michelle Jenkins, CPA, MBA and Elena Miller, MBA

Historical data is just one component of government contractor budgeting that, taken alone, will often miss the mark against actual costs or revenue. Using historicals that are looking backwards will drive the budget even farther from reality.

To develop more accurate forward pricing budgets, finance leaders should pair historical data with additional management data. Periodic trend analysis will refine the budget. This approach develops a stronger base for accurate government contract pricing models and rates – improving the likelihood of contract cost recovery and company profitability.

Instead of relying on averaged historical data, here are three tips to enhance forward pricing budgets.

Spend plans

As a proactive step to budget planning, loop in project managers and ask about anticipated spend plans on all active projects for the coming year. A large part of the discussion should include contracts that will roll off as well as new contracts starting. How will those transitions impact labor costs which is the company’s largest expense? While some employees may jump right into the next contract, others may be sidelined under “overhead” while others may be laid off for a period of time. Discuss anticipated labor changes as well as any changes to the operation – new leases, software investment, increased travel – to give leaders a more accurate assessment of anticipated expenses.

As some contracts span multiple years, project managers should have a good estimate on hours as well as direct and indirect costs. But you should also review contract terms. If the company won a multi-year contract based on 50 FTEs, but the budget headcount has changed to 40 FTEs, take that into consideration for forward pricing.

Accurate cost documentation

When contractors review their budget to actual and find a wide discrepancy, some of it can be due to inaccurate coding throughout the year. For example, utilities costs are coded to facilities in some months but added to general and administration in other months. Budgeting for utilities will be more difficult if some of that expense is hidden under G&A.

Review P&L reports for any substantial changes in numbers, and determine if it’s an actual unexpected expense or if it’s a coding error. Clean books will also support more accurate trend analysis after the second quarter to compare budget to actuals.

Budget trend analysis

A mid-year budget check-in is the best practice. In late Q2 or Q3, it is a good time to check in on the budget to see if the indirect rates are close to what you were billing at. After Q3 and into Q4, however, it is too late to re-set the budget because you are likely already thinking about next year.

With accurate trends analysis based on accurate P&Ls, leaders have a stronger foundation to make year-end revenue projections as well as decisions about things like bonuses or capital investments.

As you can see, successful government contracting operations include management input on forward pricing budgets as well as clean books and mid-year check-ins. Not only do these enhancements improve your budgeting, expense documentation and revenue projections, but they will also help your team pitch competitive proposals in the future.

If you have questions about your forward pricing budget approaches, reach out to our Government Contracting Group or contact Michelle Jenkins, CPA, Partner.

You may also like our article about R&D Tax Credit Due Diligence.